Securitisation deals gained traction in June after a subdued April and May, boosting the volume for the first quarter of this fiscal by nearly three times on-year to Rs 20,000 crore. Nevertheless, this was still only half of the pre-pandemic average. Further volumes in first quarter of last fiscal were very muted due to sharp impact on collections because of moratorium and the pan-India stringent lockdown. Around 60% of the volumes for the last quarter was seen in June alone.

April and May, this fiscal, had seen a sequential decline in collection efficiency of securitised pools due to spike in Covid-19 cases and accompanying state specific lockdowns. Though a number of deals across originators and asset classes were under negotiation, dampened investor enthusiasm meant that most deals did not consummate. Many non-banking financial companies (NBFCs)¹ also scaled down disbursements and downsized fresh business plans. Moreover, physical cash-based collection activity suffered, resulting in lower collection ratios, diminishing interest further.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings Ltd, “The impact of Covid-19 was clearly visible in the disbursements and collections of financiers. The restrictions on business activity, combined with caution exercised by companies keeping employee safety in mind, brought about an industry-wide slowdown in business operations. Besides, many entities had raised reasonable capital and liquidity to fortify their balance sheets in the past few quarters. This further diminished the appetite for immediate funding given lower disbursements, thus reducing the necessity for securitisation.”

Interest in securitisation transactions was rekindled in June as the Covid-19 case load eased. Several transactions under discussions moved ahead and were consummated. Investors such as foreign banks, private banks, public sector banks and mutual funds continued to mark their presence through cherry-picking of investments in securitised assets through either pass-through certificates (PTCs) or direct assignments (DAs).

While commercial vehicle loans remained the main draw in asset-backed securitisation (ABS), transactions backed by gold and business loans also found favour. Cumulatively ABS transactions comprised 47% of securitisation volume (see Chart 1 in Annexure). On the other hand, mortgage-backed securitisation (MBS), accounting for 53% of volume, saw interest across private and public sector banks. Interestingly, in some transactions, housing-finance companies (HFCs) invested in the assets of other HFCs.

The DA route remained more prevalent, with as much as 52% of the volume securitised through this method. Issuance of PTCs comprised the remaining 48% (see Chart 2 in Annexure).

In the past few quarters, covered bonds, a structured-finance product, have comprised 2-4% of the total issuance. These instruments involve primary recourse to the issuer’s on-book funds, and also provide an alternative recourse to a group of loan assets originated by the issuer. Depending on the transaction structure, these loan assets are either assigned to a separate trust or a special-purpose vehicle (SPV) at the inception of the transaction or subject to certain pre-defined trigger(s). These bonds continued to draw investors in the past quarter, with issuance accounting for 2% of overall volume. Additionally, issuers deployed newer asset classes such as loan against property (LAP), business loans, personal loans, and loans to other financing entities in cover pools.

Overall, more than 40 entities executed transactions, with some assignors emerging with their first-ever deals. Majority of these deals were structured in a TIUP (timely interest and ultimate principal) waterfall mechanism, with interest promised periodically and principal committed to be paid entirely only at the maturity of the transaction. A few of these transactions involved microfinance receivables from more than a single originator in the underlying pool that is securitised – this is a structural change from the usual method of having one originator per transaction and it helps in moderating concentration.

A continuation of the traction in securitisations in the foreseeable future will be contingent on the steps taken to contain the pandemic, withdrawal of containment measures, and a pick-up in business activity. Another factor impacting the securitisation volume will be the severity of asset-quality issues cropping up in issuer portfolios across asset classes.

Says Rohit Inamdar, Senior Director, CRISIL Ratings Ltd, “If the experience of the industry in fiscal 2021 is a sufficient benchmark, the volume this fiscal should be closer to the pre-pandemic level vis-à-vis last fiscal. What could, however, impact this are factors such as large-scale recurrence of Covid-19 cases, weak demand recovery, sub-normal monsoon and asset-quality issues. These would require close monitoring and their impact meticulously assessed over the next few months.”

¹ NBFCs include housing finance companies and microfinance institutions (MFI)